Wilson Connolly still overrated

THE INVESTMENT COLUMN

Six months ago we expressed surprise in this column at the generous treatment of house-builder Wilson Connolly's share price after a disappointing set of interim figures. Since then, despite a continued deterioration in the housing market, the shares have nudged curiously higher, so yesterday's 7 per cent fall from 174p to 162.5p, after even worse full-year numbers, was about time.

Wilson Connolly is proof positive of the lethargy of investors, who will often continue supporting a company long after it has become evident that the investment story has changed. The company is still the well run outfit that impressed shareholders in the 1980s, but the environment in which it operates has changed out of all recognition.

Profits for the year to December at pounds 22.5m represented a dramatic collapse from the pounds 38.2m achieved in 1994. They were also well below already reduced expectations of nearer pounds 26m. Earnings per share tumbled from 13.5p to 8.1p, leaving the maintained 4.54p dividend covered, if less than generously.

As the company freely admits 1995 was a false dawn. The problems persuading house-buyers to part with their cash were also exacerbated by a tightening of the planning process which meant that analysts expectations of 4,200 completions during the year were badly undershot at 3,870.

That had a double effect on profits because in order to boost flagging volumes, Wilson had to slash prices lower than it would otherwise have done. Lower volumes would be expected to reduce the net margin, through poor overhead recovery, but lower prices hit the gross margin as well.

The bad news is that the outlook for price rises remains as bleak as ever. The bottom end of the market that Wilson occupies, with its three and four-bedroom houses selling for an average of less than pounds 60,000, remains wickedly competitive. This is very much a buyer's market.

House prices are cheaper than ever, say the builders, trotting out the usual price to wages ratios and low mortgage cost arguments. Actually, says one broker, they are merely more affordable, an important distinction because cheapness is quickly rectified by an efficient market while affordability can persist for years.

One of the reasons Wilson's share price has remained as resilient as it has over the past year or so is the undoubted financial stability of the company. At the year end the balance sheet sported pounds 33m of net cash.

If the recovery implied by this gloomy backdrop is as gentle as many observers fear, however, then housebuilders should be valued on a very different basis from that currently used by the market. And a p/e of 19 falling to 16, assuming profits of pounds 25m this year and pounds 30m next time, is much too high a rating, with little support from a dividend yield of only 3.5 per cent. The market is still being over generous. Sell.

The flotation of McBride, Europe's biggest maker of own-label detergents, has left a good deal of egg splattered over the new face of SBC Warburg, the blue chip merchant bank which sponsored the issue. Floated at 188p last July, the shares are now languishing at 129p, up 5p yesterday, after a catalogue of woes hit the company last year, forcing it to issue a profits warning in January.

The bounce in the shares, despite a new warning that second half profits would be lower than last year, seemed to reflect relief that first half results were no worse than already much reduced expectations. Pre-tax profits slumped from pounds 14.7m to pounds 8m in the six months to December, hit by the now well publicised problems caused by the hot and humid summer weather, which wreaked havoc in its soap powder plant in Cumbria, and rampaging raw material prices.

McBride has taken action to sort out management in the Barrow and Middleton operations, where last year's difficulties were concentrated, and is set to take another 200 jobs out of the group in the second half, on top of 400 already slated to go over two years at Middleton. The cost of the extra redundancies will depress second half profits, but should bring benefits on top of the pounds 4m annualised returns expected from the shake- up already underway at Middleton.

With raw materials either flat or falling, management is confident the worst is now over and has declared a maiden dividend of 2.25p, in line with the prospectus forecast. But plenty of questions continue to hang over McBride.

It is not entirely clear that everthing that happened last year was due to bad luck. It transpires that the company was already having difficulty meeting demand for conventional powders produced by Barrow in May, well before the realisation dawned in July that the new super-concentrated detergents being made for Sainsbury and Safeway caused clogging in the machines. More seriously, it is now facing a new price war launched by Procter & Gamble, the Fairy Liquid to Ariel giant, which has been suffering market share erosion.

Next year is clearly going to remain competitive. Kleinwort Benson expects profits to recover to pounds 21m this year, rising to pounds 30m next. A 1996-97 multiple of 10 would appear to discount the worst, but this management has a lot to prove. Continue to avoid.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones